Effects of Quotas

The following are important economic effects of quotas:

The price effect: Import quotas by limiting physical quantities tend to raise the price of commodities to which they apply. While this is generally true also of a tariff, there is one important different in the impact of quotas. Mostly the rise in rice caused by a tariff is limited to the amount of the duty imposed less any decrease in price abroad. Thus the range of the price change due to tariff can well be circumscribed. In contract a quota can raise price to any extent since it paces and absolute limit upon the volume of imports nd leaves price determination in the domestic market to the interaction of supply and demand force. The price effect of quotas is thus related to (i) the restrictiveness of the quota the degree to which the supply of imported commodity is restricted (ii) the degree of elatisticity of domestic and foreign supply of the commodity; and (iii) the nature of the demand the intensity or elasticity of demand for the commodity in the importing country.

The terms of trade effect: As a result f the fixing of import quotas the terms of trade of a country change. The new terms of trade may be either more or less favourable to the country importing the quota. The terms of trade are generally improved by a quota, to the extent that the foreign offer curve is elastic. If the foreign exporters fo the commodity are well organized and the offer curve is less elastic the terms of trade may move terms of trade may move favourabel to the country imposing the quote.

The balance of payments effect: It has been argued that import quotas can also serve as a useful ends of safeguarding the balance of trade. By restricting imports quotas seek to eliminate deficit and influence the balcony of payments situation favourable. Further it is usually assumed that administrative reduction of imports through import quotas, would be a less harmful measure for correcting disequilibrium in the balance of payments than such microeconomic measures like defilation or devolution more over there is a greater expansive income effect of effect of quotas considered important for underdeveloped conjures which usually suffer from balance of payments difficulties resulting from domestic inflation. Due to import quotas the marginal propensity to import becomes zero after the quote limits is reached which thus reduces leakages and increase the value of income multipliers in the country.

Other miscellaneous effects: Another important effect of quotas is that have a protective effect. By limiting imports to a fixed amount irrespective of supply and demand conditions or price in the domestic or foreign markets import quotas may tend to be absolutely protective. They stimulate home production.

Further import quotas raise domestic price causing reduction in overall consumption. This is the consumption effect of quotas. They tend to discourage consumption of imported goods as also domestic consumption of good involving foreign raw materials since the price of these goods rise due to the artificial scarcity created by import restriction.